Infosys and Tata hit by Brexit and Trump

Brexit and the prospect of a Donald Trump presidency are weighing on earnings for India’s IT services companies, as Western clients defer expensive technology projects amid acute political uncertainty.

Shares in Infosys, the sector’s second-largest company by revenue, fell 2.5 per cent on Friday, after it forecast revenue growth of 8 per cent to 9 per cent for the 12 months to March, down from its earlier forecast of 10.5 per cent to 12 per cent.

The previous day, a quarterly revenue report from its larger rival Tata Consultancy Services had undershot analyst estimates, pulled down by weak growth in the UK and US.

Natarajan Chandrasekaran, TCS chief executive, told the Financial Times that the slower growth in those countries was driven by clients pushing back the implementation of IT projects — a trend that he attributed to the relatively volatile political situation in both countries.

“There are start delays … we’ve gone back and checked why it is happening. It’s not because people are pulling budgets, or rethinking. It’s only because there are too many things going on at this point in time,” he said, before confirming that chief among these issues were the upcoming US election and the uncertainty around the mechanics of the UK’s exit from the EU.

Infosys chief executive Vishal Sikka warned in August of “softness in some clients, post-Brexit, which was not anticipated,” and he said on Friday that a still “volatile … outside atmosphere” had contributed to the lower revenue forecast for the financial year.

Infosys suffered a blow in August when Royal Bank of Scotland cancelled a plan to transform its Williams & Glyn subsidiary into a standalone bank — a project to which Infosys had assigned 3,000 employees. Explaining the move, RBS chief executive Ross McEwan said it now expected an extended period of unusually low interest rates — a day after the Bank of England cut the base rate to a record low of 0.25 per cent, because of the referendum result, and guided that a further cut was likely.

Ashish Chopra, an analyst at Motilal Oswal Securities, said that confusion following the Brexit vote had prompted financial institutions to “go slow on spending commitments” in IT, compounding the impact of some recent large legal penalties, and the depressive effect on profit margins of interest rates close to zero.

Concern around the US election had focused partly on concerns that Donald Trump, if elected, could introduce policies to restrict companies’ use of Indian IT contractors: for example, imposing high minimum pay levels for skilled foreign workers in order to encourage hiring of local people. Companies could also be deferring projects involving outsourcing in order to avoid criticism, he added, noting the heated rhetoric on the subject during the campaign.

The political upheaval in two major markets is adding to the challenges for the Indian IT sector, which faces tough competition from US rivals such as IBM and Accenture as it overhauls its business model to offer newer services related to cloud computing and data analytics.